Medifraud Amok

Heard about the company that resold the drugs that came back in the mail? That's apparently just a normal day in the life of our under-regulated drug industry.

We're hearing those phrases again," declared Law and Order district attorney, former Republican senator, and presidential candidate Fred Thompson in a July 26 ABC podcast. "National health care, universal health care, socialized medicine. We're being told that government bureaucrats can take over our entire medical industry -- which, by the way, is the best and most complex in the world -- and make it better."

Ah yes, the bureaucrats. As if the problem with our current medical system is too much oversight by meddling government agents. In truth, while conservatives rail against government-run health care, our limited versions of that -- Medicaid and Medicare -- have been exploited as boondoggles by the same drug companies that have, since 2000, spent nearly $1 billion on federal and state lobbying drives as well as campaign donations given overwhelmingly to Republicans, according to the Center for Public Integrity. In return, the corporate drug dealers have gotten their money's worth: unbridled profits and lax regulation of both corporate fraud and drug safety.

And despite periodic hearings and investigative stories, the hard-sell marketing to doctors continues virtually unabated, with increasingly worrying effects. A recent study in The New England Journal of Medicine found that 94 percent of physicians had some type of explicit relationship with the pharmaceutical industry. In fact, a government report done in Vermont found that in 2006 drug companies gave the average psychiatrist with high drug-company earnings a bit more than $45,000 in assorted honoraria and travel expenses. The report also found that physicians who took the most payments tended, more often than other doctors, to prescribe to children "atypical antipsychotics" -- a new class of powerful medications -- although none of these drugs have FDA approval for use with kids.

The problems go far beyond aggressively peddling new drugs to doctors. If they can't widen their market legally, pharmaceutical companies are proving quite capable of defrauding government health programs by using a myriad of clever pricing and marketing scams, federal and state prosecutors have found. But the federal officials who are supposed to be fighting health scams, including the Justice Department and the lead health-care program agency, the Centers for Medicare and Medicaid Services (CMS), have traditionally been underfunded and outgunned by the drug companies. And despite public assertions by Bush administration officials that fighting pharmaceutical fraud is a top priority, a knowledgeable Justice Department official privately told The American Prospect, "I believe that starting in 2002 there was a conscious decision that the pendulum had swung too far towards health-care fraud enforcement. The investigative and regulatory agencies are less supportive of making the cases and more supportive of drug industry arguments."

It turns out there are good reasons we are "hearing those phrases again" from Democrats seeking to expand health-care coverage. Just as conservatives constantly demand to know whether Americans really want civil servants administering Medicare (it turns out, they do), it's time Democrats began asking -- through more hearings and in the presidential campaign -- whether Americans really want the pharmaceutical industry calling the shots.

Let's start with the easy part: pharmaceutical companies make money by selling pharmaceuticals. To make more money, they must either increase prices or increase volume, or both. And one major way drug firms increase volume is by promoting drugs for off-label use.

That's where things get complicated. While doctors are generally free to prescribe medicines for unapproved uses, companies are barred by law from promoting their drugs for such unproven purposes. But they do anyway, sometimes in completely fraudulent scams. In the last few months, fresh signs have emerged that corporate drug fraud is proliferating. Whistleblowers have come forward with new internal documents aimed at exposing alleged illegal marketing schemes by Pfizer and AstraZeneca, two companies that have previously paid nearly $900 million in whistleblower-based cases.

In 2003, AstraZeneca pled guilty to falsifying claims for the injectable prostate cancer drug Zoladex, and paid $355 million to settle charges that it defrauded Medicare and Medicaid. Among other practices, the government charged that AstraZeneca lured doctors to use the drug in the form of free Zoladex for which the doctors then billed the government. As with most pharmaceutical fraud cases, the information first emerged from tips provided by a drug-industry insider.

Now, a new set of anonymous whistleblowers, calling themselves the "Group of 7," have come forward to provide documents alleging illegal marketing practices, which they have given to a former Pfizer marketing vice president and whistleblower Dr. Peter Rost for his blog, Question Authority, as well as to other news outlets. The group's advocacy has helped spur the Department of Health and Human Services' Office of Inspector General to investigate allegations that AstraZeneca's sales staff violated federal laws as well as its previous "corporate integrity agreement" with the federal government by its new marketing approach to the cancer drugs Faslodex and Arimidex.

The whistleblowers claim that they were urged to promote off-label uses and to make unproven comparisons with a rival cancer drug. One internal oncology sales newsletter featured an interview with regional sales director Michael Zubillaga, who described the prevailing attitude: "There is a big bucket of money sitting in every [doctor's] office. Every time you go in, you reach your hand in the bucket and grab a handful." After the stories broke in the pharma blogs in April, Zubillaga was fired, and a spokesperson for AstraZeneca announced in early May that it had concluded an internal investigation and had taken "appropriate disciplinary action." The company did not disclose any details but conceded that some of the charges had merit. The national sales director left AstraZeneca in May, although there's been no shake-up at the higher levels.

The recent history at Pfizer is similar. In 2004, Pfizer, the world's largest pharmaceutical company, settled a case over one of its subsidiaries' peddling the epilepsy drug Neurontin for unproven off-label uses; at the time, financial analysts noted that more than 90 percent of the drug's sales were for off-label uses. Similarly, last April, two Pharmacia subsidiaries of Pfizer settled allegations that they promoted unapproved uses of and offered kickbacks for the human-growth hormone product, Genotropin, and paid $34.7 million in fines and penalties.

This spring, despite those penalties, Rost published several e-mails showing that Pfizer apparently engaged in yet more illegal marketing, according to the documents provided by an anonymous sales representative. In one memo, a sales representative urged his team last fall to search out "research-naïve" doctors, as a marketing ploy, to conduct -- for a fee -- a spurious clinical trial of the HIV drug Maraviroc before the FDA approved it. Pharmalot, a blog owned by The Star-Ledger of Newark, followed up in June with reports that Pfizer is conducting an internal probe into whether its HIV sales force has made exaggerated claims for an older HIV drug.

A Pfizer spokesperson, Bryant Haskins, challenges the reliability of Rost's blog and other news accounts questioning Pfizer's marketing ethics. "Peter Rost obviously spends a great deal of his time making unfounded allegations about Pfizer and we're simply not going to be pulled into the response game each time he serves up another accusation," Haskins said in an e-mail response to The American Prospect. "Obviously Pfizer takes very seriously any legitimate concerns that are raised about possible violations of our commercial or corporate policies."

Rost believes such apparent misconduct stems from financial pressures. And he believes it will worsen as the industry faces the loss of as much as $121 billion in prescription drug sales as those drugs go off-patent in the next four years. "I think we're actually going to see an increase in these kinds of violations," he says. "The marketing and sales people have to deliver results while the companies have a hard time coming up with great new drugs."

The pharmaceutical sales reps and their corporate leaders, however, are not in this alone. "Pharmaceutical Benefit Managers" (PBMs) act as all-purpose middlemen between drug companies and the insurance plans and many state Medicaid programs that contract with them. These PBMs administer the drug plans that patients use to buy prescriptions at local pharmacies or by mail. They make bulk purchases, negotiate drug prices, and wield vast power over which drugs get selected to be in a health plan's formulary of approved medications. The field is dominated by just three companies -- Caremark, Medco (formerly owned by Merck), and Express Scripts -- that fill as many as 80 percent of the nation's prescriptions. These companies are also joined by smaller, specialized PBMs that provide mail-order and direct pharmacy services for seniors in long-term care facilities.

Unfortunately, says Patrick Burns of Taxpayers Against Fraud -- a lawyer-funded advocacy group that promotes the use of "false claims" lawsuits by whistleblowers -- "It's a crooked business." PBMs are supposed to obtain discounts for health plans through volume purchases and drug manufacturers' rebates. But, as alleged in dozens of lawsuits filed in recent years by federal and state governments, along with HMOs, corporations, and unions, the PBMs have secretly retained most manufacturer rebates instead of passing them along to clients. They also have allegedly switched patients from low- to high-cost drugs by tricking patients and their doctors (or by just not informing them) and limiting the use of generics, and have allegedly reshipped potentially unsafe drugs that had been sent back by mail-order customers.

Last year, Medco, the second-largest PBM firm, which serves millions of Medicare beneficiaries, had to pay $155 million to settle a host of fraud claims, including the charge that the company destroyed valid prescriptions rather than face financial penalties from health plans if Medco failed to fill prescriptions quickly enough. The company was also charged with soliciting kickbacks from drug companies to favor their drugs. Medco had to enter into a supposedly rigorous corporate integrity agreement with Health and Human Services (HHS) that demanded disclosure of any side deals and more rigorous oversight by HHS' Office of Inspector General. That agreement was modeled after one reached by the government in 2005 with a subsidiary of Medco's competitor, Caremark, that involved $137.5 million in penalties.

But these kinds of corporate integrity agreements may not have much impact. The existence of such an agreement didn't seem to faze Caremark, which TheStreet.com reported last year to be facing an FBI investigation for its alleged practice of reselling drugs returned through the mail. The most damning details are found in pending whistleblower lawsuits in California and before a federal appeals court, all filed by attorney Michael Leonard of Chicago, on behalf of four ex-employees involved in Caremark's prescription drug processing facilities. The lawsuits and witness statements chronicle how drugs that were required by law to have been destroyed when returned were shipped out again. Attesting to these practices are witnesses like John Rose, who served as a supervisor in a Phoenix restocking facility. Rose recalled in a sworn statement that he was told during his training: "We were able to save a lot of money in drugs that we would otherwise be throwing out and wasting."

A spokesperson for Caremark discounts the claims in the Leonard lawsuits, noting that they haven't been pursued by any government agencies (the government takes on less than 30 percent of such cases) while arguing, "We maintain an industry-leading compliance and integrity program." The company also claims it obeys all pharmacy laws, including bans on reselling drugs.

Money is at the root of all these alleged PBM crimes. Last year, Omnicare, a smaller PBM that primarily services nursing homes and is a major Medicaid contractor, agreed to pay at least $102 million to settle Medicaid fraud charges in 42 states. One of its alleged scams: illegally switching patients to capsule versions of a drug that cost 17 times more than the cheaper tablet form. Although it didn't admit wrongdoing in those cases, it paid $52.5 million to Michigan alone, the largest civil fraud case in Michigan history. The state's attorney general, Mike Cox, said, "To defraud the Medicaid program, meant to provide for the least among us, is especially egregious." The firm's Michigan subsidiary, Specialized Pharmacy Services, was charged for fraudulent billing, including bogus claims for dead beneficiaries -- and the then-CEO of this Michigan subsidiary was charged with 148 counts of Medicaid fraud. His case is still pending.

A firm spokesman, Andy Brimmer, explained away the expensive settlements: "None of the settlements with various states included any findings of wrongdoing or any admission of liability. In agreeing to settle, Omnicare made a prudent business decision to avoid the time and expense involved in litigation."

Despite the rising tide of criticism, the Pharmaceutical Care Management Association trade group denies any widespread wrongdoing by the industry. A spokesman insisted that PBMs lower the cost for prescriptions for 210 million people who are members of health plans and employees of major corporations. He added that General Motors wouldn't contract with the PBMs again and again if they weren't delivering value.

Despite these costly settlements, fraud is proliferating. There are more than 200 lawsuits against Pfizer in federal and state courts in Massachusetts and New York alleging the company marketed Neurontin for countless ailments while racking up more than $2 billion in annual sales, even as use of the drug led to suicides and attempted suicides after the manufacturer -- and the FDA -- ignored warnings about its dangers.

One reason the fraud continues is that the fines are seemingly not high enough to stop it. All the resolved lawsuits cost Pfizer less in settlements than the questionable business practices generate in profits. For instance, the $430 million the company paid in May 2004 for its subsidiary's illegal marketing of Neurontin was only about 15 percent of the drug's gross sales of $2.7 billion in 2003. The few billion paid out in recent false claims lawsuits by major firms are seen by the drug companies as "just a cost of doing business," says Shelley Slade, a former Justice Department health fraud attorney who specializes in representing false claims plaintiffs.

What's more, the major drug companies virtually never face the most serious penalty possible: being barred from participating in government health programs such as Medicaid and Medicare, which account for more than half the sales of all prescription drugs. "If they're disbarred from those programs, for a lot of them, that's the death knell," says Thomas Greene, an attorney who represented a whistleblower in the Neurontin case. Yet as Burns, of Taxpayers Against Fraud, points out, barring major drug companies from these programs could be too disruptive to doctors and patients who depend on their medications for legitimate, vital care. He suggests a stronger disincentive to fraud that doesn't harm patients: barring lawbreaking companies from extending their patents on their most profitable drugs.

Another part of the problem is structural. The False Claims Act, a Civil War-era law that was strengthened in 1986, is the federal government's primary weapon in recovering billions stolen by a wide range of U.S. government contractors, as it authorizes the sharing of settlements with whistleblowers. But because government agencies lack the manpower and skills -- and enough whistleblowers -- to catch drug-pricing fraud, the pace of the cases is glacially slow, with roughly 70 percent of whistleblower-submitted cases ultimately rejected by prosecutors. According to Taxpayers Against Fraud, there is a backlog of 180 federal lawsuits alleging false claims about drugs by pharmaceutical companies, representing a potential recovery of $60 billion in funds to the federal government and state Medicaid programs. To drug companies, this slow pace of prosecution renders the possibility of fines almost hypothetical. Additionally, while prosecutors investigate, these cases remain "sealed," often for years, so the public doesn't know the number of repeat offender companies amid the hundreds of pending federal and state cases. This shortfall at the federal level is even more striking given that the federal government directly gets back an estimated $15 or more in reclaimed revenues, criminal fines, or civil penalties for every $1 spent in false claims act prosecutions.

Finally, despite all the agencies set up to detect pharmaceutical fraud, it's usually up to whistleblowers -- who are hard to come by -- to make the major cases possible. The former assistant U.S. attorney in Philadelphia, Jim Sheehan, who has left that job to become New York state's new Medicaid inspector general, points out: "For every good fraud case, you need somebody who is inside and knows the bad stuff. Otherwise, the defense can hide the ball from you forever."

The Centers for Medicare and Medicaid Services, which administers these federal oversight programs, has been cited in years' worth of highly critical reports and oversight by Congress and the Government Accountability Office (GAO). Indeed, Democrat Henry Waxman, chairman of the House Committee on Oversight and Government Reform, says that none of the potential enforcement agencies, including the Justice Department, Centers for Medicare and Medicaid Services, and HHS' inspector general, have "lived up to their responsibilities," despite the occasional high-profile bust of shady doctors and medical supply companies.

Today's congressional investigators scorn CMS' "bureaucratic indifference," as one Hill staffer says, and agree with a 2005 GAO report that found "minimal oversight" by CMS of Medicaid's drug rebate program that is supposed to garner manufacture discounts. Rep. Pete Stark, the Democrat from California who is chairman of the House Ways and Means Committee's health subcommittee, says CMS is "absolutely incompetent, derelict, and could very well be criminal" when it comes to oversight of Medicare payments to drug companies. Adds Waxman, "We have failed the taxpayers if we allow these dollars that were intended for prescription drugs to be stolen or wasted, and we also let down the elderly, poor, and disabled who need these medications."

Since the Medicaid-slashing Deficit Reduction Act (DRA) of 2005, Medicaid's ability to reduce waste and fraud supposedly has been strengthened, but few outside CMS expect it to crack down on drug companies. In fact, as Leighton Ku, a Medicaid expert at the Center on Budget and Policy Priorities, observes, "There was a deliberate choice with the DRA that it's okay to harm poor beneficiaries -- but they went out of their way to avoid cuts to drug companies."

Politically, though, it's still important for the Bush administration to appear to fight health-care fraud. To that end, with the backing of the White House, the DRA law authorizes CMS to start a significant new initiative, the "Medicaid Integrity Program," that aims to strengthen federal oversight of state Medicaid fraud control efforts by hiring outside contractors to catch rip-offs. A CMS spokesman, Jeff Nelligan, says of the Medicaid integrity initiative, "We hope to see the results of this new, aggressive effort to combat the kind of fraud that can threaten the future of this vital program." But Stark, judging by the agency's approach to Medicare oversight, believes the ballyhooed new program "won't accomplish anything."

While CMS has largely failed to monitor and prevent drug company fraud, it's often up to the Justice Department to actually pursue the false claims cases so critical to punishing errant companies and recovering taxpayer dollars. And there, too, the effort has been relatively weak. Health-care fraud enforcement hasn't been politicized like, say, the civil-rights division. But the lack of resources devoted to cracking down on lucrative pharmaceutical fraud is a disturbing political decision in its own right. Perhaps no more than "a dozen or so full-time attorneys" work in the central Justice Department on pharmacy fraud, according to James Moorman, president of Taxpayers Against Fraud, while the department apparently diverts as much as $30 million a year allocated to it for fighting health-care fraud to other pet causes. (The Justice Department declined to answer questions on this topic.) At hearings before Waxman's oversight committee, Moorman, citing these issues and the backlog of fraud cases, observed, "There is a serious danger that the Justice Department will be unable to resolve most of these cases in a timely and satisfactory manner. The reason is a lack of resources and top-level leadership."

After all, as one Justice Department official put it even more bluntly, "It's hard for us to fight health-care fraud in between handling immigration and child pornography cases."

Damn bureaucrats. Always meddling.

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About the Author

Art Levine is a contributing editor of The Washington Monthly and a former Health Policy Fellow with the Progressive Policy Institute (PPI). He is the author of PPI's 2005 report, “Parity-Plus: A Third Way Approach to Fix America's Mental Health System,” and is currently working on a book on mental-health issues. He also blogs at The Huffington Post. Follow at ArtL7 on Twitter.